The Staging of Venture Capital Financing: Milestone vs. Rounds

37 Pages Posted: 2 Sep 2005

See all articles by Eli Talmor

Eli Talmor

London Business School

Charles J. Cuny

Washington University in St. Louis - John M. Olin Business School

Date Written: April 2005

Abstract

Venture capital funding is commonly provided to start-up firms on a piecemeal basis over numerous stages. One way in which this can be implemented is through milestone financing, where a venture capitalist commits upfront to providing additional future funding contingent upon the firm meeting certain conditions, or milestones. Alternately, the firm can operate without a firm commitment in place, still reasonably expecting to be able to receive additional rounds of funding after goals are met (round financing).

We identify four dimensions which can affect the optimal contract and choice of financing method: entrepreneurial effort, venture capitalist effort, venture capitalist preference for liquid investments, and heterogeneous expectations about the feasibility of the underlying real technology. The effects of these on the optimal milestone and round financing contracts are examined. Firms that prefer milestone financing to round financing (and conversely) are characterized.

Keywords: Venture capital, stage financing, milestones

JEL Classification: G32, M13

Suggested Citation

Talmor, Eli and Cuny, Charles J., The Staging of Venture Capital Financing: Milestone vs. Rounds (April 2005). Available at SSRN: https://ssrn.com/abstract=487414 or http://dx.doi.org/10.2139/ssrn.487414

Eli Talmor (Contact Author)

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 7000 (Phone)

Charles J. Cuny

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
(314) 935 4527 (Phone)

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